The Foreign Account Tax Compliance Act (FATCA) becomes fully effective on July 1, 2014. The Internal Revenue Service (IRS) has announced a number of changes to the former Offshore Voluntary Disclosure Program (OVDP) as well as FATCA enforcement that impacts U.S. taxpayers with foreign assets.
The major changes taxpayers should be aware of are on the enforcement side. For taxpayers who enter in to the OVDP, penalties have increased from 27.5% to 50% of the undisclosed foreign assets. However, the alternative “streamlined” disclosure program is now open to U.S. residents, though residents must show that their failure to disclose was non-willful. U.S. residents will also face a 5% penalty that foreign residents would not normally face. This change should make the streamlined disclosure program open to more U.S. residents who are not facing criminal issues or higher penalties.
There are a number of legal nuances to the OVDP and the streamlined program. For example, the IRS will not clear any person in to the OVDP if the bank or institution where the foreign assets are held is under investigation by the IRS. Additionally, a person wishing to go through the streamlined process must show that their failure to file taxes or failure to declare foreign assets was non-willful.
In the context of Foreign Bank and Financial Accounts (FBAR) form filings with the Treasury Department, the IRS may consider some of the following activities as willful failure to file:
-Checking the “NO” box on Schedule B of the Individual Income Tax return that asks whether you have a foreign account.
-Maintaing an account in a known “tax haven”, for example, Switzerland.
-Creating a nominee entity such as a trust, international business company or foreign corporation with no apparent legitimate business purpose.
-Moving an account or closing it once the bank or institution is perceived to be under investigation.
While the acts above may appear to create a willful failure in the eyes of the IRS, the Internal Revenue Manual allows the IRS discretion in determining willfulness.
In addition to tax return filings on Form 8938 required under FATCA, taxpayers should also be aware of the U.S. Treasury regulations requiring the filing of an FBAR to declare foreign bank accounts and assets. FATCA and FBAR are separate requirements and the following chart from the IRS shows some of the differences between the two (click the image to see it bigger):
The rules governing FATCA and FBAR filings are complex and the penalties for failing to file can be immense. For example, a non-willful failure to file a FBAR carries a $10,000 penalty, while a willful failure carries a penalty which is the greater of $100,000 or 50% of the foreign asset. A determination of willful failure to file can also lead to criminal prosecution (jail).
Our firm handles tax matters for U.S. and foreign residents with international assets. Issues in international tax cases are fact-specific and involve complex rules. We work with our clients to ensure that their IRS filings, including the FBAR and FATCA-related declarations, are accurate and optimized for clients’ needs. The IRS and U.S. Treaury Department impose substantial penalties for failure to file as well as filing errors. Our firm will work with you to correct past errors and ensure timely filing of current statements. We work with clients located all over the world, please contact us at our Washington, D.C. office for help.